Variation to contract

The ability of an employer to vary Terms and Conditions of employment before or after a TUPE transfer has been changed under the new version of the regulations. According to the Government, any purported variation will be void if the ‘sole’ or ‘principal’ reason is either the transfer itself or the fact that a reason connected with it is not of an economic, technical or organisational nature engendering changes in the workplace (Regulation 4.4).

On the other hand, an employer and employee may agree a variation if (1) the sole or principal reason for the variation is a reason connected with the transfer that is of an economic, technical or organisational nature necessitating changes in the workforce or (2) a reason unconnected with the transfer (Regulation 4.5).

The basic problem with the variation permitted under (1) above is that the Daddy’s Dance Hall example we highlighted in last month’s introductory article does not expressly allow for variations instigated for an economic, technical or organisational reason. It appears to invalidate variations which are “by reason” of the transfer.

However, the Government thinks it illogical to permit dismissals for an economic, technical or organisational reason (provided for in Regulation 8.2 of the 1981 TUPE Regulations, and in Regulation 7 of the TUPE Regulations 2006), but not variations of contract.

In practice, this change may be rather more limited than it appears at first glance. A variation for a reason connected with the transfer may only be justified by an economic, technical or organisational reason if that reason also engenders a change in the workforce. As interpreted in the context of transfer-connected dismissals under Regulation 8.2 of the TUPE Regulations 1981 in the case of Berriman versus Delabole Slate Ltd, this expression means there must be a change in the numbers of the workforce, or possibly their job functions.

Although in some cases there will be no numerical change, there may be a change in the make-up of the individual employees who comprise the workforce. This limits the apparent flexibility afforded to employers by the new regulations since relatively few contract amendments will involve such a change in the composition of the workforce.

Clearing up the confusion

Many employers in the security sector and beyond will be confused by the extent of these changes and what, exactly, an employer is now allowed to do in respect of altering a given employee’s Terms and Conditions of Employment. Our view on the matter is best summed up as follows...

If the employer can demonstrate that the sole or principal reason for the change is one that’s unconnected with the transfer then employment contracts may be varied.

On the other hand, if an employer’s sole or principal reason for the change is connected with the transfer, a change may take place if that connected reason is an economic, technical or organisational one entailing changes in the workforce.

That said, as explained, when proposing changes to Terms and Conditions most employers will not put forward a change which will give rise to any difference in the workforce. They simply want to alter the Terms and Conditions on which the workforce is employed, not their number. In such a case, the changes made under the new TUPE Regulations will be of no use to employers.

Changes where the sole or principal reason is the transfer of staff itself (or a reason connected with the transfer which is not of an economic, technical or organisational nature entailing changes in the workforce) are void.

As explained, unless the economic, technical or organisational reason connected with the transfer also entails a change in the workforce, this change will be void. The DTI guidance states: “There is no statutory definition [of the term “entailing changes in the workforce”] but interpretation by the Courts has restricted it to changes in the numbers employed, or to changes in the functions performed by employees. A functional change could involve a new requirement for an employee who held a managerial position to enter into a non-managerial role, or to move from a secretarial to a sales-related position.”

At this juncture, it’s important to stress that minor changes to Terms and Conditions of Employment do not normally entail changes in the workforce. In addition, the new definition on changing Terms and Conditions does not allow a transferee employer to harmonise the Terms and Conditions of transferred workers to equivalent grades and types of employees that the company already has on its books. As the DTI guidance suggests: “According to the way in which the Courts have interpreted the Acquired Rights Directive, the desire to achieve ‘harmonisation’ is by reason of the transfer itself. It cannot, therefore, constitute an “economic, technical or organisational reason connected with the transfer entailing changes in the workforce.””

A final point, of course, is that there’s currently no guidance concerning the time period after the transfer where it is safe for the transferee to vary contracts because the reason for the change cannot have been by reason of the transfer due to the passage of time.

Here, the DTI guidelines state: “There is likely to come a time when the link with the transfer can be treated as no longer effective. However, this must be assessed in the light of all the circumstances of the individual case, and will vary from case to case. There is no 'Rule of Thumb' used by the Courts or specified in the regulations to define a period of time after which it is safe to assume that the transfer did not impact directly – or indirectly – on the employer’s action.”

Transfer-connected dismissals

A new Regulation 7 implements the Government’s wish to clarify the existing Regulation 8 of the 1981 TUPE Regulations. Under Regulation 7.1, where either before or after the transfer an employee of the transferor of transferee is dismissed, the employee is automatically unfairly dismissed if the sole or principal reason for the dismissal is (1) the transfer itself or (2) a reason connected with it that isn’t an economic, technical or organisational one entailing changes in the workforce. Where there is an economic, technical or organisational situation necessitating changes, Regulation 7.1 ceases to apply and the dismissal is not then automatically unfair.

Of much interest is Regulation 7.3, which corrects an anomaly currently contained in Regulation 8 of the 1981 Regulations. Under Regulation 8 as currently drafted, dismissals for an economic, technical or organisational situation entailing changes in the workforce are deemed to be for “some other substantial reason” within the meaning of unfair dismissal law. This has created some doubt as to whether an employee who is redundant could claim to be dismissed by reason of redundancy for the purposes, for example, of asserting their right to a redundancy payment.

Fortunately, this is overcome by a welcome Regulation 7.3(b) by providing that such dismissals may be regarded as having been by reason of redundancy where the appropriate test in Section 98.2(c) of the Employment Rights Act 1996 is fully satisfied.

Article 4(a) of the Acquired Rights Directive 2001/23 exempts from transfer rights – under supplementary company or inter-company pension schemes that relate to employees’ rights to old age – invalidity or survivors’ benefits “unless Member States provide otherwise”. Under Regulation 10 of the Regulations, however, such provisions of an occupational pension scheme – as defined by the Pension Schemes Act 1993, or alternatively the Social Security Pensions (Northern Ireland) Order 1975 – are still excluded from transfer under Regulations 4 and 5 of the new Regulations (as is currently the case under Regulation 7 of the TUPE Regulations 1981).

That said, it is expressly provided (in Regulation 10.2) that provisions relating otherwise than to old age, invalidity or survivors’ benefits are not treated as being part of the scheme, and are therefore liable to transfer under Regulations 4 and 5. By this provision, the Regulations codify the European Court of Justice (ECJ) cases involving Beckmann versus Dynamco Whicheloe MacFarlane and Martin versus South Bank University in which it was held that early retirement benefits triggered by redundancy in the Whitely Council Terms and Conditions were not “old age” benefits and therefore liability in relation to them passed to the transferee.

The Government has not taken the option in Directive 2001/23 to impose the wholesale transfer of pension obligations from transferor to transferee. Instead, it has created a more modest obligation on transferees to make pension provisions under the Pensions Act 2004, by the Transfer of Employment (Pension Protection) Regulations 2005 (which have been in force since April 2005).

It is also to be noted that employees’ rights on public sector transfers will continue to be governed – in practice – by the Cabinet Office Statement of Practice (2001) and A Fair Deal for Staff Pensions and, in local Government, by the 2003 Code of Practice on Workforce Matters in Local Government.

Dealing with insolvency

The insolvency provisions of the Regulations are contained in Regulations 8 and 9. It should be borne in mind that there’s no equivalent to Regulation 4 of the 1981 Regulations which purports to enable avoidance of the Regulations on insolvency disposals by the methodology of “hiving down”. Regulation 4 of TUPE 1981 is a great example of the tendency in early legislation to transpose Community Law to seek to tailor community obligations according to national self-interests.

Under Regulation 4 of the TUPE Regulations 1981, prior to the disposal of an insolvent undertaking it was envisaged that the insolvency practitioner creates a wholly-owned subsidiary to which the business to be sold is transferred. Employees are retained by the original transferor company and lent out to the subsidiary, which operates with no employees. The subsidiary company – or its business – is then disposed of, and seemingly free of employees. The transfer of an undertaking that would ordinarily arise is, by dint of Regulation 4, postponed to allow this avoidance scheme.

In all honesty, this provision is in breach of the aims of the original Directive 77/187 and could, in practice, no longer effectively operate after the House of Lords decision in the case involving Litster versus the Forth Dry Dock and Engineering Company. It was rendered worthless by the decision taken in ‘The Matter of Maxwell Fleet and Facilities Management (In Administration)’ and now rightly disappears from the new TUPE Regulations altogether.

The new TUPE Regulations 2006 provide that Regulation 4 (covering the transfer of employment regulations) and Regulation 7 (which concentrates on protection against dismissal) do not apply where the transferor is the subject of bankruptcy proceedings or any analogous proceedings which have been instituted with a view to the liquidation of the assets of the transferor, and are under the supervision of an insolvency practitioner. Whether a particular insolvency procedure is covered by the Regulations, this depends on the purpose of the procedure concerned.

As a result, there is no need to list all kinds of insolvency procedures in England, Wales, Scotland and Northern Ireland to which the Regulations apply (and thereby avoids the need for consequential amendment in the future on insolvency law reform). However, it does incorporate the inherent uncertainty in the ECJ case test law as it will be unclear sometimes even in the case of administration whether the purpose of the procedure is to continue the business or liquidate the assets. The Government has taken the easiest route by ‘copying out’ the provisions of Article 5.1 of Directive 2001/23.

Relaxation of the provisions

Directive 98/50 (now Directive 2001/23) offered Member States the option, however, to relax the provisions of the Directive on applicable insolvency proceedings covered by the Directive in two important respects – by allowing the non-transfer of certain debts from transferor to transferee (provided employees are adequately safeguarded), and permitting alterations to employment contracts via employee representatives designed to safeguard employment opportunities by ensuring the survival of the undertaking.

The Regulations take up both of these options. Regulation 8 prevents the operation of Regulation 4 to transfer liability for unpaid sums due to transferring employees provided these are sums reimbursable by the Secretary of State as identified in the ‘relevant statutory schemes’. It’s important to bear in mind that other debts owed by the insolvent transferor to relevant employees (ie debts that either fall outside of the categories payable under the relevant statutory schemes, or which exceed the statutory upper limits under those provisions) will still pass to the transferee.

No doubt the possibility of increased rescues of insolvent businesses would be further enhanced were the transferee to be given an entirely clear slate of all pre-existing employment liabilities owed by an insolvent transferor. However, this would afford insufficient protection to employees, and be inconsistent with Article 5.2(a) (which states that employees must be given the protection of reimbursement of non-transferring debts).